The US economy is shrinking, threats loom, but growth is likely to continue 2022-04-28 13:30:49

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Washington (AFP) – The US economy contracted in the first three months of the year, and Facing threats from high inflation And high interest ratesHowever, economists expect growth to return for the rest of 2022 based on labor market strength and consumer spending.

Economists say the first quarterly drop in GDP since the pandemic in 2020 – a 1.4% year-on-year decline – is unlikely to be a precursor to a recession. may bring A little relief for President Joe Biden and Democrats, who will face midterm elections this year in which soaring prices for food, energy and other necessities will be a major topic of the Republican opposition.

There were two main drivers of the US economy’s downturn in the last quarter, according to Thursday’s report from the Ministry of Commerce:

Imports rose about 20% as Americans spent heavily on foreign goods, while exports fell about 6% as growth abroad slowed — a widening trade deficit that subtracted 3.2 percentage points from GDP.

– Companies built stocks aggressively ahead of last year’s holiday shopping season, when they feared supply shortages linked to the pandemic, so they recovered stock more slowly at the start of 2022, reducing GDP by 0.8 percentage points.

As a result, the country’s total output of goods and services fell well below the 6.9% annual growth rate in the fourth quarter of 2021.

However, higher wages supported strong spending by households, and higher profits spurred investment by businesses. These factors point to strong foundations for the US economy, even in the face of the challenges of the pandemic, the war in Ukraine and the Federal Reserve’s plans to raise interest rates to fight inflation.

“The report is not as alarming as it appears,” said Lydia Bossour, chief US economist at Oxford Economics. “The details indicate an economy with strong fundamentals that have demonstrated resilience in the face of Omicron, persistent supply constraints and high inflation.”

The American economy is in an unusual and difficult situation.

The labor market – the most important pillar of the economy – remains strong, with the unemployment rate close to a 50-year low of 3.6%, and wages steadily rising. In the January-March quarter, businesses and consumers increased their spending at an annual rate of 3.7% after adjusting for inflation.

Economists consider these trends to be a better measure of the underlying strength of an economy than the most recent GDP number.

However, serious threats emerged. Supply chain disruptions in China and elsewhere are still a reality in the era of the pandemic, and the war in Ukraine is contributing to rising inflation, eroding consumers’ purchasing power. Last month, prices It jumped 8.5% from the previous yearthe fastest rise of its kind in four decades.

“We are at a turning point in the economy,” said Gregory Daco, chief economist at tax advisory firm EY-Parthenon. “The pace of growth is moderate.”

The weak first-quarter display contrasts with last year’s strong recovery from the pandemic, which was driven in part by massive government aid and ultra-low interest rates. With other stimulus measures and government support coming to an end, consumer spending slowed from its sharp pace in the first half of last year.

The negative GDP number in the last quarter also undermines a key policy message for President Biden. The president pointed to rapid growth as a counterweight to rising inflation. Compounding Biden’s difficulties, Russia’s invasion of Ukraine and rising coronavirus cases abroad are weighing on the economy and adding to inflationary pressures. Many companies are also still struggling to get the parts and supplies they need from interlocking supply chains.

The MOOYAH, Texas-based chain of Plano, is facing higher costs for meat, cake and packaging supplies, and has raised wages to attract and retain workers.

“Every aspect of doing business has become significantly more expensive,” said Doug Wilmarth, president of the company.

However, despite the supply chain hurdles associated with the pandemic, MOOYAH still plans to open an additional 20 restaurants this year. “We believe very strongly in American consumers and the American economy,” he said.

Despite a surge in imports in the first quarter, the COVID lockdown in China is likely to keep supplies short this year. Ford and General Motors said this week that they still couldn’t get all the computer chips they needed, costing them sales and forcing a temporary factory closure.

The global economy is expected to grow more slowly this year, according to the International Monetary Fund. He expects the Ukraine and COVID war to slow global growth to 3.6% this year, down from 6.1% last year.

Thursday’s GDP report showed consumers adjusting their spending patterns as the pandemic fades and with rising food and gas costs consuming household budgets. Adjusting to inflation, spending on clothing, gasoline and groceries fell in the first quarter. But Americans spent more on services, including travel and dining out.

The Fed had hoped such a shift would bring down inflation, as prices for goods have risen more than services in the past year. But now the prices of airline tickets, hotels and restaurant meals are also on the rise.

Federal Reserve Chairman Jerome Powell has indicated plans for a rapid series of price increases to combat price hikes. The Fed is set to raise its key short-term interest rate by half a percentage point next week, the first significant increase of that size since 2000. Two additional increases of half a point are expected – twice the typical increase of a quarter point. At subsequent Federal Reserve meetings. It would be one of the fastest Fed rate hikes in decades.

Powell is betting that with jobs near record levels, consumer spending healthy and unemployment extraordinarily low, the Fed It can slow the economy enough to tame inflation without causing stagnation. Whether the Fed can deliver is one of the key tests for the US economy in 2022.

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